House panel endorses CREATE MORE

House of Representatives committee on Thursday endorsed to members a bill that seeks to lower the income tax on both local and foreign companies to 20% under a so-called enhanced deduction regime, while streamlining the tax refund system for corporations.

Substitute House Bill No. 9794 or the CREATE MORE (CREATE to Maximize Opportunities for Reinvigorating the Economy) bill will amend Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

The committee report will be taken up at the House Ways and Means panel next week before it is debated at the plenary.

The measure seeks to enhance fiscal and nonfiscal provisions of the Tax Code and “reconcile disparities between the CREATE Act and its implementing rules,” Albay Rep. Jose Ma. Clemente S. Salceda, who heads the Ways and Means Committee, said in a fact sheet that accompanied the committee report.

The CREATE law had imposed a 25% income tax on companies and limited the 20% rate to local enterprises with income not exceeding P5 million ($89,513) and assets worth P100 million and below. It also restricted the zero-rating on value-added tax (VAT) on local purchases to the sale of goods and services directly used in a project of a registered exporter.

Under the proposed CREATE MORE, domestic and export companies, including those inside ecozones and freeports, will be entitled duty exemptions, VAT exemption on importation, and the VAT zero-rating of local purchases.

Companies outside ecozones and freeports will also enjoy VAT zero-rating on local purchases as well as duty exemption on the importation of capital equipment, raw materials, spare parts, or accessories, according to a copy of the committee report.

The proposed law also seeks to establish a 20% corporate income tax rate on local and foreign corporations under the enhanced deduction income tax regime.

Registered business enterprises (RBEs) will also enjoy a 200% additional deduction for power cost, to be accumulated during the Income Tax Holiday (ITH) period. They may also enjoy 100% additional deductions in expenses for trade fairs, missions or exhibitions.

The bill also seeks to include the tourism industry under the coverage of the reinvestment allowance, and to apply the net operating loss carryover within five years after the ITH entitlement period.

The proposed law also seeks to impose a 1 1/2% RBEs local tax in lieu of any and all taxes to be collected by IPA.

VAT incentives for RBEs that enjoy incentives prior to the enactment of CREATE will be extended from 10 to 12 years, if there is no tax refund or credit granted. RBEs may also enjoy duty incentives for the remainder of the 10-year transitory period.

Under the measure, the power to grant and approve tax incentives would be returned to investment promotion agencies (IPAs), which is currently handled by the Fiscal Incentives and Review Board (FIRB).

“The President may, in the interest of national economic development, or upon the recommendation of the FIRB, modify the mix, period or manner of availment of incentives provided under this Code or craft the appropriate financial support package for a highly desirable project or a specific industrial activity,” according to a copy of the committee report.

The bill essentially limits the FIRB’s power to grant and approve fiscal incentives, upon the recommendation of President Ferdinand R. Marcos, Jr.

The measure also allows the information technology and business process outsourcing sector to “conduct business under alternative work arrangements.”

Under the CREATE MORE bill, the Bangsamoro Board of Investments and the Bangsamoro Economic Zone Authority will also be included under the list of IPAs.

If enacted into law, foreign nationals with executive positions and nonresident aliens in supervisory, technical and advisory positions will receive a working visa, while a special skills visa may be granted to foreign nationals with “highly specialized skills.”

Domestic market enterprises in creative industries listed under RA 11904 or the Philippine Creative Industries Development Act will also be entitled to the ITH period.

Eleanor L. Roque, tax principal of P&A Grant Thornton, said lawmakers must ensure that the bill’s tax provisions take into account the Philippines’ membership in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) seeks to address tax avoidance schemes among its 140 member countries.

“An improvement of the set of incentives granted to qualified investors is expected to improve our attractiveness as an investment destination. The 20% income tax rate with the enhanced deduction is a generous incentive to investors. Depending on their cost structures, it can lead to a really low tax payable,” Ms. Roque said in a Viber chat.

“However, since the Philippines has joined the international efforts against tax avoidance by joining the OECD/G20 Inclusive Framework on BEPS and Pillar 2 initiatives, the bill should also consider how the incentives will impact on companies covered by BEPS-Pillar 2,” she said.

“We must ensure that taxes for transactions and activities in the Philippines are paid in the Philippines and not in other jurisdictions who have adopted local rules to implement Pillar 2.”

Jose Enrique A. Africa, executive director of think tank IBON Foundation, said lowering taxes under the CREATE MORE would reduce government revenues.

“One of the big selling points of the CREATE law, [is to] make our corporate income taxes quote unquote competitive with others in the region,” Mr. Africa said at a news briefing. “That attitude is eroding our fiscal space.”

“The resources for development won’t come if the government is choosing to lower income taxes, [on] those [who] should contribute more to the revenues of the government,” he added. – By Beatriz Marie D. Cruz, Reporter